GE-Alstom tie-up opens the door to China

General Electric’s takeover of Alstom may have knocked one of its two European competitors out of the market, but it also indirectly makes way for a new player to enter the fray — from China.

GE’s €12.5 billion acquisition of France’s Alstom gives the U.S. company more than 50 percent of Europe’s €25 billion market for gas turbines, and leaves just one other significant competitor on the continent, Germany’s Siemens. The world’s third-largest turbine company, Mitsubishi, is not active in Europe.

But, to appease the European Commission’s antitrust authority, GE has agreed to sell the core parts of Alstom’s heavy duty gas turbine business to Italy’s Ansaldo, the fourth-largest turbine-maker, which is 40 percent owned by China’s Shanghai Electric.

“The world needs a third player, and, as some of these assets will be sold to Ansaldo, and therefore indirectly to Shanghai Electric. Shanghai Electric will acquire capabilities to manufacture gas turbines both in Europe and China,” said Harald Thaler, director for the energy industry at the consultancy Frost and Sullivan.

And that is likely to be a welcome addition for utilities that buy gas turbines in a shrinking market, added Christian Egenhofer, associate senior research fellow at the Center for European Policy Studies.

“In this market, which is highly consolidated, utilities tend to keep the third or fourth competitor alive,” he said. “This way they can say ‘There’s a third supplier, so be nice to us’.”

Ansaldo’s presence in the gas turbine industry is currently limited, with smaller research and development capabilities, a narrower range of products and less geographic reach, according to the European Commission. At the same time, Ansaldo has the know-how and experience, and an efficient factory for gas turbines and other power plant components, it added.

GE’s sale to Ansaldo is expected to be signed in the coming weeks and finalized within three months after that.

The tie-up with Alstom will boost GE’s total installed base by 50 percent, to 1,500 gigawatts, with 700 gas turbines. Around 34 of those turbines, or 12 GW will go to Ansaldo.

The assets to be sold include Alstom’s heavy-duty gas turbine technology for the GT 26 and GT 36 turbines and roughly 1,000 research and development engineers out of 65,000 total employees, about half in the U.S. and half in Switzerland.

In addition to letting Shanghai Electric into the EU market, the deal may also lead to a technology leak, or at least exchange, with China, said William Mackie, a stock analyst at Kepler Cheuvreux.

“The Chinese have an objective to develop a large gas turbine in 10 years. This might have brought it forward by a few years,” he said.

None too pleased

While the sale may be welcome in Brussels, GE is unlikely to be pleased about it, said Georg Zachmann, a research fellow at Bruegel, a think tank. And not because it loses a share of gas turbines it might have wanted to sell itself, but because the EU’s turbine market is already overcapacity as a result of lower electricity demand, cheaper coal and surging renewables.

“The reason that GE might not be very happy to sell the gas turbine business is that GE might not want to nurture a more capital-strong competitor to its own turbine business in the shrinking EU market, and overseas,” Zachmann said.

The Commission believes advanced heavy-duty gas turbine technology is “crucial” to the EU’s climate action fight, because gas is the cleanest, most efficient and flexible fossil fuel and can provide a reliable backup to the less predictable power generated by renewables.

Thaler agreed. “Eventually the older machines will need to be decommissioned,” he said of existing gas-fired power plants. “Coal power plants are no longer being build in Europe, so in the future we will need new gas turbines. I think there will be a new demand cycle in the next few years.”

Others, however, say burning gas is not the only way to ensure Europe doesn’t lose power whenever the sun stops shining or wind stops blowing, which creates doubt as to future demand for turbines.

There are new demand-response programs, in which electricity suppliers try to better balance their supplies, as well as energy storage technologies and interconnection projects that ensure countries can turn to their neighbors during shortages or oversupplies.

“Gas is one of the flexibility options but there are other options,” said Egenhofer. “The view that gas is the only answer, which was brought by the gas industry a long time ago, I think is wrong.”